The 2023 results were in line with forecasts and our expectations, and the 1Q24 results fell short of our expectations

The company announced its 2023 results: revenue of 781 million yuan, up 11.9% year on year; net profit to mother of 146 million yuan, up 48.1% year on year, falling into the forecast range of 140 to 160 million yuan; deducted non-net profit of 109 million yuan, up 12.2% year on year, falling into the forecast range of 105 to 125 million yuan; in line with our expectations. At the same time, 1Q24 results were announced: revenue of 175 million yuan, up 32% year on year; net profit to mother of 15.87 million yuan, down 72% year on year; deducted non-net profit of 16.22 million yuan, up 88% year on year. 1Q24 revenue and profit fell short of our expectations. We believe it is mainly due to the fact that customer demand recovery is progressing less than expected.

Development trends

The revenue-side audio and video business contribution has increased, and the photo business may still be recovering. In 2023, the audio and video business subsidiary Optical Plant Creative achieved revenue of 212 million yuan. Considering the merger that began in April 2023, we estimate that it contributed more than 150 million yuan to the company's revenue during the year. Without considering the increase in the audio and video business, we determine that the company's image copyright business revenue has declined compared to 2022. The main reason is that the external macro environment and advertisers' marketing budgets are still recovering, affecting the company's main business needs. 1Q24's revenue increased 32% year over year, and we judge that this was mainly due to the increase in the audio and video business. Looking ahead, we believe that the company's audio and video business is expected to continue to increase volume in line with customer demand; in terms of images, we are focusing on changing trends in advertisers' marketing needs and iteration of AI application-driven business models.

Gross margin declined slightly due to the consolidation of the audio and video business, and expenses continued to be controlled. In terms of gross margin, the year-on-year decline in 2023 was 3ppt to 51.2%, with 2H23 falling 2.5/0.4ppt to 51.0% month-on-month; 1Q24 falling 5ppt to 52% yoy, increasing 6ppt month-on-month. We judge the year-on-year decline in gross margin, mainly due to the lower gross margin of the audio and video business compared to the photography business; in the future, with a relatively stable revenue structure and the scale effect of the audio and video business with its own revenue volume, we believe that the company's overall gross margin is expected to rise steadily. In terms of expenses, the company said it will continue to invest in AI application research and development. In 2023, R&D expenses increased by 22.5% to 100 million yuan, and R&D expenses increased by 1ppt to 13%; sales and management expenses decreased by 3/2ppt to 11%/13% year on year, respectively.

The advantages of the “AI+scene+content” layout are highlighted, and AI applications are being promoted in multiple dimensions. We believe that based on the company's rich high-quality images, audio and video data, and high-frequency commercialization scenarios around media publishing and advertising ideas, the company's business is expected to be deeply integrated with AI technology. The company said at the performance conference that, relying on the AI visual creative industry model, it has promoted AI applications in intelligent search, AI image editing tools, and visual digital asset management platforms on the vcg.com website. In April, Vision China's image synthesis algorithm passed the national filing. We recommend focusing on the iteration of the company's AI vertical model and the progress of AI applications in improving the efficiency of the company's business.

Profit forecasting and valuation

Considering that the company's business is still recovering, net profit due to mother for 24/25 was reduced by 12%/7% to 1.5/170 million yuan. Maintain a neutral rating, maintain the SOTP valuation method, maintain 58 times 24-year P/E for visual content and services, 8 times P/S for audio and video business, reduce the target price by 8% to 13.4 yuan, and potential upward space of 3%.

risks

Business recovery fell short of expectations, major models progressed less than expected, AIGC changed its service model and competitive landscape, and public opinion risks copyright disputes.